Loading...

How Much Car Can I Afford?

Are you dreaming of a new car? It’s time to stop dreaming and act. But first, you’ll need to ask yourself—and your family budget---how much car can i afford?

How Much to Spend on a Car?

Before we get to budgeting for your car, you might want to put together a ‘wish list’ for your next vehicle.

Obviously we’d all like to spend as little as possible on our new car, but are there ‘must-haves’ for your next vehicle? For example, if you have three children, you’ll probably want an SUV or a minivan, rather than a subcompact. If you’re planning to tow a boat or a trailer, you’ll need something relatively powerful. Or would the lack of leather seats, a sunroof, satellite radio or a built-in GPS unit be a deal breaker? All of these features or body styles will affect how much you’ll spend on a car.

Be honest with yourself, then check the prices on manufacturers’ websites. While all the toys add up, often option packages combining several popular choices are available at a discount.

How much car can I afford: Budgeting

Before you can welcome this shiny new addition to your family, you’ll need to figure out your budget. When deciding how much to spend on a car, you’ll need to see what car you can afford, based on your income and your expenses.

When wonder, "what car can I afford," the first question to ask yourself (because it will be one of the first questions a banker or dealer finance person will ask) is what is your monthly income after taxes. Don’t be surprised if the finance people ask you to document your income, with a check stub or a phone number they can call to confirm your employment. Your income can also include items like business income, tips, social security, alimony or structured payments from insurance settlement s.

So take a blank piece of paper and write down your income after taxes, on a monthly basis. If you’re married, you can combine your incomes.

Now, before you can determine how much to spend on a car, you’ll need to deduct (or subtract) your monthly expenses from that number. For most people, the first and biggest number to deduct will be housing expenses, such as your monthly rent or mortgage payment. Other expenses to include would be food and dining, utilities, credit cards, health care, kids and education, shopping, travel, loans and debts, and other vehicle costs. Don’t forget to add in some monthly savings for your future as well.

You’ll also have to budget for the ‘other’ costs of your new vehicle, beyond the monthly payment. These expenses include registration, maintenance, fuel and insurance. So add up these and any other monthly expenses, then subtract them from your monthly income after taxes. What’s left over will show you how much car you can afford, in terms of monthly payment.

Understanding Assets

To get a car loan, you’ll also need a down payment. So another key element in the ‘how much car can I afford’ equation is your assets.

Assets could be money in the bank, stocks or bonds you can sell, or your current car that you can trade in. This is important, because when getting a car loan, you are generally expected to put down part of the payment, often 20%. The more you put down, the lower your monthly payment will be.

For example, let’s say you’re shopping for a $20,000 car. If your trade-in is worth $3,000, you’ll have to finance $17,000. At 5%, your monthly payments will be $391, and you’ll pay a total of $1,792 in interest over four years. But if you can come up with another $3000 in cash, you’ll only have to finance $14,000. Not only will this bring your monthly payments down to $322 per month, but over the four years of the loan, you’ll pay only $1,476 in total interest, so you’d save $316 in interest costs over the life of the loan.

So how much car can you afford? Obviously, if you can put down more money, you could also get a more expensive car. If you had a trade-in worth $5,000 you put down on a $25,000 car, your monthly payment would be $461, on a 48-month loan at 5% interest. But if you could come up with another $2000 in cash up front, your monthly payments would be $415---10% less.

Having a larger down payment may also help persuade a credit manager who’s on the fence that you’re credit-worthy.

Other Situations

If you haven’t established credit, or you have bad credit (such as late payments, charge-offs, etc) if you do get a car loan you may have to settle for a higher interest rate, a larger down payment or both.

For students and young people, getting a guarantor to co-sign the loan will also help you answer ‘what car can I afford’. Just remember the loan is a legal document, and should you fail to pay it back, the guarantor will be liable.

If you’re on a limited income, a new car with a substantial monthly payment that could overwhelm your budget may not be the right choice. Instead, purchasing a good used car outright for cash might be the best way to go.

Bottom Line

Ultimately, there’s no one-size-fits-all answer to the question of how much to spend on a car. But understanding your needs, income and expenses will help you answer the question of how much car can I afford, whether you’re buying a Cadillac or a Kia.